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What Type of Small Business Loans Are Used for Working Capital?

 

Small businesses employ many types of financing products to generate working capital. The options range from commercial real estate mortgages to equipment financing, and from asset-based lending (ABL) to secured bank loans and lines of credit. While they all are great resources for businesses, they can sometimes be difficult to get and often require the business owner to pledge collateral.

Working capital financing, in contrast, isn’t collateralized against a specific asset. This is to the benefit of many small business owners; they often don’t have assets that can be used as security. For these business owners, an uncollateralized loan, what most banks call an “unsecured” liability, is the perfect solution.

Alternative lenders have different perspectives on these types of loans. They understand the risk and implements its own policies, including rules about interest rates and borrowing limits. For them, the benefits of aiding small businesses and getting them the cash they need, fast outweighs the risks, so they do what they can to help.

What Characterizes Working Capital Loans?

Besides the lack of required collateral, working capital financing has a couple of other unique characteristics. These are outlined below.

Purpose

Small business loans for working capital are typically used to source inventory, hire employees, fund a building expansion, or pay off an emergency expense. For example, if you own a seasonal business, you may need more inventory and employees in November than in March. Working capital financing helps you meet a short-term need—with long-term benefits. If you have inventory and salespeople, you can complete more sales and keep customers happy.

Other times, you need working capital for a small building project. It could be as simple as funding a new HVAC unit. Then again, it could be you need to knock down a wall to create more working space for employees.

Emergency expenses are just that: emergencies. When a machine on the manufacturing floor breaks down, you have to pay the repair and/or replacement costs. It’s critical equipment. The longer it’s out of commission, the more of a detrimental effect it will have on employee productivity and output. In that situation, you absolutely need working capital financing. There are no ifs, ands, or buts about it.

Amount and Duration

When you apply for working capital, you can expect to receive funding anywhere from $5,000 to over $500,000. Be smart; you should do some calculations based on expenses and expected revenue to ask for the exact amount you need to positively impact your business.

Working capital loans also lead shorter lives than standard bank loans, with terms of four to 18 months. That isn’t a rule set in stone. Some lenders offer terms up to three years.

Repayment

Most working capital loans require you to make daily payments, although some new lending options offer weekly and monthly repayment terms. The benefit with day-to-day payments is that it makes cash flow management easier. You can spread the payment out over the course of 30 days rather than prepare all month long for a big, single expense.

Are you ready to get a small business loan to grow your business? Get started today!

 


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